Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have caused the industry to lag recently as services stocks have collectively shed 7.6% over the past six months. This drop was worse than the S&P 500’s 2.8% decline.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here is one services stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Business Services Stocks to Sell:
Getty Images (GETY)
Market Cap: $322.3 million
With a vast library of over 562 million visual assets documenting everything from breaking news to iconic historical moments, Getty Images (NYSE: GETY) is a global visual content marketplace that licenses photos, videos, illustrations, and music to businesses, media outlets, and creative professionals.
Why Do We Avoid GETY?
- Sales trends were unexciting over the last two years as its 3.5% annual growth was below the typical business services company
- Free cash flow margin shrank by 14.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Diminishing returns on capital suggest its earlier profit pools are drying up
Getty Images’s stock price of $0.77 implies a valuation ratio of 22.7x forward P/E. If you’re considering GETY for your portfolio, see our FREE research report to learn more.
CoreCivic (CXW)
Market Cap: $1.89 billion
Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE: CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.
Why Is CXW Not Exciting?
- Annual revenue growth of 3% over the last five years was below our standards for the business services sector
- Free cash flow margin dropped by 7.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- ROIC of 5.9% reflects management’s challenges in identifying attractive investment opportunities
CoreCivic is trading at $19.61 per share, or 11.7x forward P/E. To fully understand why you should be careful with CXW, check out our full research report (it’s free).
One Business Services Stock to Watch:
IonQ (IONQ)
Market Cap: $10.19 billion
Founded by quantum physics pioneers from the University of Maryland and Duke University in 2015, IonQ (NYSE: IONQ) develops quantum computers that process information using trapped ions to solve complex computational problems beyond the capabilities of traditional computers.
Why Do We Like IONQ?
- Annual revenue growth of 143% over the past two years was outstanding, reflecting market share gains this cycle
- Market share will likely rise over the next 12 months as its expected revenue growth of 81.7% is robust
- Adjusted operating profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
At $27.98 per share, IonQ trades at 45x forward price-to-sales. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
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